In Europe’s capitals, a muted debate about taxes and spending

By Edward CodyBy Edward CodyMarch 17, 2012

PARIS — The Socialist candidate in France’s presidential election, Francois Hollande, promised recently that if elected he would impose a whopping 75 percent income tax on all earnings over a million euros.

Hollande’s conservative opponent, President Nicolas Sarkozy, immediately denounced the idea as a demagogic attack on highly paid executives. But two weeks later, Sarkozy announced his own soak-the-rich pledge: Families that reside abroad to flee high levies here will have to pay French income taxes or lose their nationality.

Fiscal specialists point out that both measures were political gestures, designed to win votes by flattering traditional resentment of the wealthy among France’s working class. Because they would hit few people, the specialists said, neither measure would substantially reduce the colossal French government debt that helped push Europe into a dangerous yearlong financial crisis from which it only now is emerging.

Despite the depths of that crisis, the question of whether to raise taxes is intruding only modestly in European politics, usually with populist pitches such as those made by Hollande and Sarkozy. The terms of the debate make for a sharp contrast with the United States, where President Obama and his Republican rivals spar regularly over whether to let taxes rise modestly for the very wealthy or to cut them further — and over how much to rely on spending cuts as part of the equation to trim deficits.

In France, as in most European countries, the main tactic for reducing the deficit and carving back debt has been to reduce expenditures. The emphasis on cutbacks was a natural reaction by the conservative governments in power among the main countries that use the euro, the European Union’s common currency.

In part, this is because Europeans, with expensive social-protection systems to finance, already are taxed to the hilt. In addition, economists agree that added taxes would inhibit growth even further — and growth is what Europe desperately needs to pull out of the crisis for good.

The focus on spending cuts generated angry opposition from labor unions and leftist parties, which demanded more emphasis on growth as a way out of the crisis.

Here in France, for instance, Hollande has promised to renegotiate a recently signed European Union fiscal discipline treaty, saying it relies too heavily on budget reductions and should include investment and other measures to stimulate growth. On Thursday, the leaders of left-wing parties in Germany and Spain endorsed his call to revise the treaty.

Labor unions in Spain recently held another in a series of national strikes to protest what they said was a lopsided approach to meeting Madrid’s obligation to reduce government debt.

The often drastic cuts in European capitals have lowered living standards for millions of families and contributed to long lines at employment offices; unemployment averages above 10 percent in the euro countries.

Civil servants have had their salaries rolled back in Greece and Spain, for example, and the retirement age has risen from 60 to 62 in France, climbing even more in Spain.

Across the continent, government health-insurance systems have reduced what they pay for treatment, forcing people to take out complementary private policies to make up the gap between reimbursement rates and what doctors and hospitals charge.

A comprehensive study by Zsolt Darvas and Jean Pisani-Ferry of the Bruegel economic research institute in Brussels showed that European countries that had to slash between 5 and 10 percent of gross domestic product in response to the crisis relied mostly on paring expenditures. Even those that had to slash more than 10 percent of GDP resorted to a cut-heavy mix of cuts and tax hikes, the study showed.

“I think what’s happening, if you set Greece aside and what they’re suggesting in France with the 75 percent tax rate, is a moderate [fine-tuning] of existing taxes, because most Europeans are pretty highly taxed already,” said Peter Cussons, an international corporate tax partner with PWC accounting firm in London. “There is not a lot of scope for new taxes.”

European leaders who had stuck mainly to reducing government spending after the banking crisis of 2008, however, were more willing to seek added revenue from new or slightly increased taxes after the debt crisis became alarmingly clear last fall, the Bruegel researchers found.

Special case of Greece

From the beginning of the crisis, Greece was a special case. Facing bankruptcy and striking out in all directions under international pressure, the Greek government has raised taxes sharply since acknowledging in the fall of 2009 that its deficits were far higher than it had previously admitted.

The top value-added tax rates shot up to 23 percent, for example, and taxes on the highest incomes rose to 45 percent. The definition of what counts as income was also broadened, hitting even more families that previously had been exempted through creative accounting.

Greek and international experts have warned, however, that Greece is hitting the limit of what income and other taxes can do. Public resentment is spreading, they said, and any hopes of growth are being squeezed off, leaving further government spending cuts as the only option for further debt reduction.

“We’ve had an increase in just about every kind of tax you can imagine,” said Panos Tsakloglou, an economist at the Athens University of Economics and Business and a Finance Ministry adviser. “There isn’t any room for increasing taxes right now in Greece. Reduction of public debt will have to come through spending cuts.”

In any case, tax evasion has long been Greece’s national sport. Any hope of raising government income through new taxes would have to include new enforcement levels, so people pay what they owe. A new property tax imposed late last year, for example, set off days of street protests. The reason: It will be levied through electricity bills, so those who fail to pay will not get electricity.

Tax problems in Italy

Italy long has vied with Greece as Europe’s tax-dodging champion. As a result, alongside spending cuts, collection of existing taxes has remained the focus rather than imposing new ones.

Tax officials in Rome estimated that evaded taxes on legal commerce, coupled with lost taxes from illegal or under-the-table deals, cost the national treasury about $340 billion a year. If collected, they calculated, that amount could pay back Italy’s $2.6 trillion debt in just under eight years.

But history has shown the struggle is not easy. Italian tax authorities recently revealed, for instance, that an aerial survey uncovered more than a million homes and other buildings across the country that were undeclared and whose owners were not paying property taxes.

Under the strait-laced new government of Prime Minister Mario Monti, police have launched spectacular raids on tax-evading businesses. They have taken to patrolling luxury resorts and stopping flashy sports cars to see if the drivers declared revenue high enough to pay for such luxuries. So many were pulled over that Ferrari officials at a recent auto show issued a warning that things were being taken too far.

Correspondents Michael Birnbaum in Warsaw and Anthony Faiola in London contributed to this report.